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Insight to All Things Currency and Treasury Management

Currency wars have been in the news quite a bit lately. As is usually the case, there’s a lot of speculation and hyperbole. So I’d like to take the opportunity here to explain three things that any company doing business internationally and/or in other currencies really needs to know about currency wars.

1. “Coming” currency war? We’re already in one. Despite what the G20 says publicly, over the last 18 months we’ve seen significant competitive devaluation from nearly every continent. Consider:

  • ŸBrazil: Brazil began operating a “dirty float”, much like China does, which allows the real to float within a tight band of about BRL$2 to BRL$2.10 to the dollar. Finance Minister Guido Mantega claimed the shift was a necessary reaction to other countries’ currency manipulation, commenting: “If the whole world is going to manipulate their exchange rates, we will too.”[1]
  • Ÿ Venezuela: On February 13, the Venezuelan government devalued the bolivar by 32 percent, a move aimed to bolster the country’s oil exports and bring more money into government coffers ($13.4 billion more, cutting the government’s budget deficit in half).[2]
  • Japan: A commitment to yen-weakening policies was a centerpiece of newly elected Japanese Prime Minister Shinzo Abe’s campaign. Now at about 94 per U.S. dollar, the yen has declined 18 percent in the last year. Japanese officials have said that they will continue active monetary policy at least until the yen reaches 100.
  • South Korea: After the Bank of Japan pledged to buy government bonds in potentially unlimited quantities, officials in South Korea, where many manufacturers compete with the Japanese, said that they would consider a policy response to a weaker yen. Bank of Korea Gov. Kim Choong-soo said that a sharp drop in the yen could provoke an “active response to minimize any negative impacts on exports.”[3]
  • Switzerland: Switzerland has openly manipulated its currency since 2011, pegging the Swiss franc to the euro in an effort to dissuade use of the franc as a safe haven currency in Europe (as that would increase the value of the franc and make Switzerland’s exports less competitive).
  • United States: In the U.S., the result of three rounds of quantitative easing – where the Fed prints money to buy trillions of dollars’ worth of mortgage-backed securities and treasury bills in order to stimulate the economy – are widely considered to have the effect of  weakening the value of the dollar.

These are just some of the more obvious examples of the countries involved in the global currency war. A report last summer from the Washington-based Peterson Institute of International Economics, for example, identified 20 countries as “the most egregious currency manipulators.”[4]

2. The G20’s proclamation against exchange rate manipulation is not only disingenuous; it’s dangerous. At the meeting of the G20 last week in Moscow, finance ministers from the world’s most powerful countries openly rejected the notion of currency wars and publicly “agreed” to not engage in competitive devaluation as a tool for economic stimulus. Yet considering the kinds of highly manipulative activities noted in the list above – many by G20 members – the G20’s proclamations are incredibly disingenuous.

What’s more, they’re dangerous. The G20’s misleading representation of their true intentions vis-à-vis exchange rate management put the markets on edge. In this environment, even small shots fired in the currency war can create big shocks in the market, and big impacts on corporations.

3. Currency war is the new norm; uncertainty and risk is the overarching issue for corporates. That currency wars are impacting MNCs (often significantly) is not an aberration; this is the new norm, and every year it’s getting worse. The overarching issue for corporates, then, is continued uncertainty and risk. In the last 18 months we’ve seen currency impacts from the euro, yen, Latin American currencies, and the yuan – the battlegrounds are constantly shifting. What we’ve learned is that we don’t know where the next impact will come from; it could be anywhere.

But when the impact does arise, it arises quickly. For example, even before Venezuela announced its plans to weaken the exchange rate by 32 percent, top executives from leading multinational companies (especially CPGs) warned that a bolivar devaluation would reduce their earnings outlook.

Multinational corporations that have not become currency agnostic are seeing significant currency surprises for two reasons: first, is increasing internationalization, which opens MNCs up to greater currency exposure. Second is heightened currency volatility caused by the raging currency war. In this environment, currency risk management is critical. Fortunately, with cloud-based exposure management technology that kind of management can be done at the push of a button.


[1] Financial Times, “Brazil admits tight hold over exchange rate,” 24 Oct 2012.

[3] The Wall Street Journal, “Japan Rejects Currency Manipulation Claims,” 25 Jan 2013.

[4] Joseph E. Gagnon, “Combating Widespread Currency Manipulation,” Peterson Institute of International Economics, July 2012.